NBER WORKING PAPER SERIES TRADE ADJUSTMENT: WORKER LEVEL EVIDENCE David H. Autor David Dorn Gordon H. Hanson Jae Song Working Paper 19226 http://www.nber.org/papers/w19226 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2013 We thank Stéphane Bonhomme, David Card, Pinelopi Goldberg, Lawrence Katz, Patrick Kline, Brian Kovak and numerous seminar and conference participants for valuable comments. Dorn acknowledges funding from the Spanish Ministry of Science and Innovation (ECO2010-16726 and JCI2011-09709). Autor and Hanson acknowledge funding from the National Science Foundation (grant SES-1227334). The findings and conclusions expressed herein are those of the authors and do not represent the views of the Social Security Administration or the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w19226.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2013 by David H. Autor, David Dorn, Gordon H. Hanson, and Jae Song. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Trade Adjustment: Worker Level Evidence David H. Autor, David Dorn, Gordon H. Hanson, and Jae Song NBER Working Paper No. 19226 July 2013 JEL No. F16,J62 ABSTRACT In the past two decades, China’s manufacturing exports have grown spectacularly, U.S. imports from China have surged, but U.S. exports to China have increased only modestly. Using representative, longitudinal data on individual earnings by employer, we analyze the effect of exposure to import competition on earnings and employment of U.S. workers over 1992 through 2007. Individuals who in 1991 worked in manufacturing industries that experienced high subsequent import growth garner lower cumulative earnings and are at elevated risk of exiting the labor force and obtaining public disability benefits. They spend less time working for their initial employers, less time in their initial two-digit manufacturing industries, and more time working elsewhere in manufacturing and outside of manufacturing. Earnings losses are larger for individuals with low initial wages, low initial tenure, low attachment to the labor force, and those employed at large firms with low wage levels. Import competition also induces substantial job churning among high-wage workers, but they are better able than low-wage workers to move across employers with minimal earnings losses, and are less likely to leave their initial firm during a mass layoff. These findings, which are robust to a large set of worker, firm and industry controls, and various alternative measures of trade exposure, reveal that there are significant worker-level adjustment costs to import shocks, and that adjustment is highly uneven across workers according to their conditions of employment in the pre-shock period. David H. Autor Gordon H. Hanson Department of Economics IR/PS 0519 MIT, E52-371 University of California, San Diego 50 Memorial Drive 9500 Gilman Drive Cambridge, MA 02142-1347 La Jolla, CA 92093-0519 and NBER and NBER [email protected] [email protected] David Dorn Jae Song CEMFI Social Security Administration Casado del Alisal 5 Office of Quality Performance 28014 Madrid 2121 Crystal Drive, Suite 825 Spain Arlington, VA 22202 [email protected] [email protected] 1 Introduction Among the most significant recent changes in the global economy is the rapid emergence of China from a technologically backward and largely closed economy to the world’s third largest manu- facturing producer in the space of just two decades. Between 1990 and 2000, the share of world manufacturing exports originating in China increased from 2% to 5%, and then accelerated to 12% in 2007 and to 16% in 2011 (Figure 1). China’s export surge is the outcome of a major expansion in its manufacturing capacity, unleashed by economic reforms in the 1980s and 1990s (Naughton, 2007). Since 1990, China has accounted for over three quarters of the growth in manufacturing value added generated by low and middle income countries, as its share of manufacturing output within this group has risen from 15% to 44% (Hanson, 2012). For U.S. manufacturing, China’s expanding role in global trade represents a substantial com- petitive shock. Manufacturing still accounts for the majority of U.S. trade, and hence the rise of China presents stiff competition to the labor-intensive industries that remain in the United States.1 Not only is China’s export growth concentrated in manufacturing, but its growth in imports, in particular from the United States and other high income countries, has been comparatively sluggish, thus leading to large trade imbalances. During the last decade, China’s average current account surplus was 5% of GDP, the mirror image of the U.S. current account deficit over the period. As Chinese imports to the United States surged, U.S. manufacturing employment underwent a historic contraction. Although the level of employment in U.S. manufacturing had been declining modestly since the start of the 1980s, this trend gained pace in the mid-1990s and accelerated sharply in the 2000s: the number of workers employed in U.S. manufacturing fell by 9.7 percentage points between 1991 and 2001 and by an additional 16.1 percentage points between 2001 and 2007.2 In the wake of China’s spectacular growth, there has been a spirited if uneven policy debate about the consequences of rising trade competition for the United States. Whereas trade theory devotes attention to the fact that long-run gains from trade are expected to be positive, public debate about globalization frequently centers less on trade’s net benefits than on the short-run costs of adjusting to import competition.3 Missing in the debate is hard evidence on whether and by how much U.S. manufacturing workers have been affected by trade with China. Though it is well documented that U.S. factories have closed and employment has declined in apparel, furniture, children’s toys, and 1According to the World Development Indicators, in 2010 China accounted for 17% of global value added in manufacturing, up from 5% in 1991. 2U.S. manufacturing employment was 18.3 million in 1991, 16.6 million in 2001, 13.9 million in 2007, and 11.4 million in 2011, according to County Business Patterns data. 3E.g., Wayne Ma, “China Denies Currency Manipulation,” Wall Street Journal, October 17, 2012; Tom Barkley, “Trade Deal Clears Hurdle in Senate,” Wall Street Journal, August 4, 2011. 1 other industries in which imports from China have surged (Bernard, Jensen, and Schott, 2006), we know little about how workers in these industries have adjusted to trade shocks. In this paper, we examine the impact of exposure to rising trade competition from China on the employment and earnings trajectory of U.S. workers over the medium to long-run. We define trade exposure as the growth in U.S. imports from China over 1991 to 2007 that occurred in a worker’s initial industry of affiliation. Our focus is on the extended consequences of trade shocks based on where a worker is employed in 1991, around the time the shock initiates. By holding the industry constant, we avoid selection problems arising from the post-shock resorting of workers across industries. The choice of the outcome period is dictated on the front end by the availability of bilateral trade data that can be matched to U.S. manufacturing industries and on the back end by the onset of the Great Recession, which severely battered U.S. manufacturing. These years span much of China’s export boom, as the 1990s and especially the early 2000s (following China’s WTO accession in 2001) are when the country’s export growth accelerates (Figure 1).4 Using individual worker-level data from the U.S. Social Security Administration, we estimate the impact of exposure to Chinese import competition on cumulative earnings, employment, movement across sectors, and receipts of Social Security benefits over the period 1992 to 2007. The data permit us to decompose worker employment spells by firm and industry and to examine variation in trade impacts according to worker and firm characteristics. To account for possible correlation between industry imports and industry domestic demand or productivity shocks, we instrument for the change in U.S. imports from China using import growth in other high income countries within 397 harmonized product categories, each corresponding to a U.S. manufacturing sector.5 Key to our identification strategy is that China’s growth over the period appears driven by improvements in its domestic productivity and the reallocation of resources to manufacturing arising from the dismantling of central planning, looser restrictions on rural-to-urban migration, and the liberalization of trade and investment (Naughton, 2007; Hsieh and Ossa, 2011; Brandt, Van Biesebroeck, and Zhang, 2012). Hsieh and Klenow (2009) report that since the early 1990s, the median Chinese manufacturing plant had average annual TFP growth at the astounding pace of 15%. To account for the possible correlation between workers’ potential earnings and their initial industry affiliation, we 4Naughton (1996) marks 1984 as when China’s export growth began. However, the government initially kept many restrictions on foreign trade and investment. In Figure 1, China’s share of world manufacturing exports rose unevenly from 1% in 1984 to 2% in 1991. It was not until 1992, when Deng Xiaoping wrested power back from hardliners who had rebounded after the events at Tiananmen Square in 1989, that the country welcomed FDI by promoting Special Economic Zones (Naughton, 2007).